The termination of international joint ventures: Closure and acquisition by domestic and foreign partners

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IBR-1174; No. of Pages 13 International Business Review xxx (2015) xxx–xxx

Contents lists available at ScienceDirect

International Business Review journal homepage: www.elsevier.com/locate/ibusrev

The termination of international joint ventures: Closure and acquisition by domestic and foreign partners Jose´ Mata a,*, Pedro Portugal a,b a b

Nova School of Business and Economics, Campus de Campolide, P1099-032 Lisboa, Portugal Banco de Portugal, Lisboa, Portugal

A R T I C L E I N F O

A B S T R A C T

Article history: Received 12 December 2013 Received in revised form 8 December 2014 Accepted 14 December 2014 Available online xxx

We study different modes of terminating international joint ventures, namely closure and acquisition, and ﬁnd that different forces govern the two termination modes. Decisions regarding asset speciﬁcity and the size of the venture affect the likelihood of closure, but not that of acquisition. In contrast, full acquisition by one of the partners is related to history of the venture before the joint venture was formed, to decisions made at the time of the creation with respect to equity split between partners, and to subsequent changes of these initial decisions. Joint ventures that were created de novo are more likely to be closed down than those that were previously fully owned by one of the parties. The proportion of equity initially held by each partner and subsequent increases in this proportion increase the likelihood of the venture being fully acquired by that partner. ß 2014 Elsevier Ltd. All rights reserved.

Keywords: Joint ventures Dissolution Termination Survival Closure Acquisition

1. Introduction Many studies have shown that international joint ventures (IJVs) confront high chances of termination (see Kogut, 1988 for a seminal paper and Nemeth & Nippa, 2013 for a recent survey). Termination can occur in different ways: by dissolving the venture or by having one of the partners fully acquire the venture, and these different modes of dissolution may be prompted by different causes. For example, Kogut (1991) found that unexpected industry growth increases the likelihood of acquisition by one of the partners, but unexpected fall in industry shipments does not increase likelihood of dissolution. Hennart, Kim, and Zeng (1998) also found that the determinants of termination of JVs explain the selling of JVs, but not their liquidation, while Chang and Singh (1999) found that older ﬁrms shut down businesses, but younger ﬁrms sell them. Furthermore, they found that businesses that have entered by acquisition are more likely to exit by sell-off, a ﬁnding that was also reached by Mata and Portugal (2000) in the context of foreign ﬁrms. Even if the possibility of acquisition by different partners is generally acknowledged, (e.g. Meschi & Riccio, 2008), studies looking at dissolution of joint-ventures by acquisition

* Corresponding author. Tel.: +351 213801653. E-mail address: [email protected] (J. Mata).

typically focus on acquisition by the foreign partners (e.g. Puck, Holtbru¨gge, & Mohr 2009), and the study by Hennart, Roehl, and Zietlow (1999) remains as one of the few that have examined the issue of which partners acquire and which divest the joint venture. In this paper we analyze the process of joint venture termination and consider the alternatives by which termination can occur. We distinguish the factors that lead to closure from those that lead to acquisition by the domestic and foreign partners. Most of the studies mentioned above discuss a single set of determinants of joint venture termination and report evidence that while one type of termination is affected by the hypothesized forces, the other is not. In contrast, we develop explicit hypotheses for the factors that lead to the different types of termination. We explicitly distinguish acquisition by foreign and domestic partners and are able to identify forces that have opposite effects upon each type of termination. Speciﬁcally, we are able to uncover the impact that ownership split at the formation of the joint venture and at different points of its evolution exerts upon the termination of joint ventures by acquisition and upon which partners end up fully acquiring the joint venture. First, ownership before the formation of the joint venture matters; those joint ventures being created by a partial acquisition of a previously fully owned business have a greater likelihood of terminating by being bought back by the former owner. Second, ownership arrangements at the time of the

http://dx.doi.org/10.1016/j.ibusrev.2014.12.004 0969-5931/ß 2014 Elsevier Ltd. All rights reserved.

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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formation of the joint venture also matter for the likelihood of full acquisition and for which partner ends up becoming the sole owner of the venture. We ﬁnd that disproportionate equity splits not only create instability, but also tip the acquisition process toward the majority owner. This is further reinforced by renegotiations over equity split that occur after the formation of the joint venture. Joint ventures in which one of the partners increases its equity share are more likely to be later fully acquired by that partner. Closure, in contrast, is related to the antecedents of the joint venture, to joint venture size and to intangible investments made at the inception of the joint venture. Joint ventures that are created from scratch, those that are small, and those that do not rely much on intangible assets are more likely to be shut down than those that are created from a partial acquisition of a previously existing ﬁrm, those that are large, and those that rely more on intangibles. Our analysis carefully controls for the evolution of joint venture termination over time. Even though some studies have controlled for age in their analysis, to our knowledge, the way the likelihood of termination of IJVs evolves over time has not been thoroughly examined, except for the studies of Park and Russo (1996) and Park and Ungston (1997). The fact that we distinguish between different termination modes may exacerbate a problem that is common to all the studies relying on age dependence, that is, the relationship between the probability of an event and age: the evidence that the probability of terminating a joint venture decreases over time can be spurious and arise because the sample includes a proportion of ﬁrms that do not confront the risk of termination via that particular termination mode. We account for this possibility and, indeed, ﬁnd that there is a non-negligible fraction of joint ventures that may never terminate by any of the three modes considered. We ﬁnd that termination by domestic acquisition is roughly constant over time. In contrast, the chances of termination by acquisition by the foreign partner increases over time, which ﬁts well the view of joint ventures as options to expand (Kogut, 1991). Finally, the chances of termination by closure increase after a few ﬁrst years, which is consistent with the view of multinationals as footloose organizations (Gorg & Strobl, 2003).

& Tihanyi, 2007; Puck et al., 2009). Indeed, Zaheer, Hernandez, and Banerjee (2010) report that those international acquisitions that were preceded by a form of alliance between the acquired and the acquiring companies show better returns than those that were not preceded by such alliances. When uncertainty is high the asymmetry of information is exacerbated and sequential investment and divestment become more likely (Reuer & Shen, 2004; Folta & Miller, 2002). However, not all acquisition joint ventures will be successes and develop according to plan. While there is little knowledge about what proportion of joint ventures terminate according to the plan, one of the few studies on this matter (Makino, Chan, Isobe, & Beamish, 2007) provides evidence that unanticipated termination by far dominates with only 10% of the joint ventures being terminated according to what had been planned. Steensma et al. (2007) show that joint ventures in which there is conﬂict between partners are likely to become fully owned, especially if decision power is markedly unbalanced between partners. One way of terminating a joint venture that came about through the partial acquisition of an ongoing ﬁrm is a full reacquisition by its former full owner (Chi & Seth, 2009). When partners of such a joint venture conclude that the match between them is not good, a buyback is an easy way to end the venture, as it amounts to a return to the previous position. It has been argued that this would be a natural route for terminating joint ventures partially acquired by a foreign party as this party would be insufﬁciently committed to the venture (Hennart et al., 1998; Steensma et al., 2007). This argument extends naturally to any acquiring partner and thus, ﬁrms that were previously wholly domestic are more likely to return to their wholly domestic status, while those that were previously fully owned by foreigners are more likely to become wholly owned by foreigners again. Hypothesis 1. Joint ventures that were created from an already existing ﬁrm are more likely to be bought back by the original owner than to be acquired by the joining party.

2.2. Contractual arrangements—Initial equity share 2. Modes and determinants of joint venture termination International joint ventures can be terminated by shutting down their facilities or by continuing operations under the full ownership of either the domestic or foreign partner. These three different outcomes are likely to be governed by different forces and the attributes of the joint ventures are likely to exert disparate impacts upon the probabilities of terminating in different ways. 2.1. Ownership before the formation of the joint venture While most of the literature implicitly regards joint ventures as new entities created by the partnering ﬁrms, the truth is that joint ventures can be created by partial acquisition of equity in an ongoing ﬁrm (Chen & Hennart, 2004; Chen, 2008). A common reason for making a partial acquisition is to mitigate the asymmetric information problem inherent to full-acquisitions (Chen & Hennart, 2004; Reuer & Ragozzino, 2008). By keeping the former owner with an interest in the ﬁrm following the partial acquisition, his incentives to mis-represent the true state of the ﬁrm and to engage in non-observable value reducing activities is diminished. To the extent that partial acquisitions are a way of overcoming problems of asymmetric information associated with full-acquisitions, it is reasonable to expect that the successful development of these acquisitions eventually terminates with the joining party fully acquiring the ownership (Steensma, Barden, Dhanaraj, Lyles,

Conditions that are relevant for the longevity of joint ventures include the initial contractual arrangements established between partners. Different partners make different contributions to the joint venture and these contributions are reﬂected in the agreements under which JVs are formed (Blodgett, 1991). Although control of a joint venture cannot be taken to be identical to the distribution of equity among partners (Zhang & Li, 2001), the initial distribution of equity reﬂects the distribution of bargaining power among partners and control over the ﬁrm (Yan & Gray, 1994; Mjoen & Tallman, 1997). For the joint venture to be stable, the arrangements must be such that all parties are satisﬁed with them. Uneven distributions of equity may have costs for the stability of the joint venture, because the smaller the share that one partner has in the joint venture, the greater the likelihood that it will behave opportunistically (Inkpen & Currall, 2004), and free-ride on the other partner. Joint ventures with uneven equity splits have been found to be more prone to termination (Blodgett, 1992), which is likely to occur due to the initiative of the dominant partner to avoid this opportunistic exploitation. Furthermore, to the extent that large equity shares reﬂect a partner’s high contribution to the joint venture, a large share in the venture is an indication that the ﬁrm may more easily survive without the other party than vice-versa. Therefore, if one partner holds a disproportionately high equity share in the ﬁrm, the chances are that it will eventually acquire full control of the ﬁrm.

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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Hypothesis 2. The greater the share of initial equity held by one partner, the more likely it is that this partner takes full control of the ﬁrm.

Hypothesis 4. Joint ventures that were created from an already existing ﬁrm are less likely to be shut down than greenﬁeld joint ventures.

2.3. Changes in contractual arrangements—Increases in equity share

2.5. Efﬁciency advantages and asset speciﬁcity

Many joint ventures adjust equity ownership splits over their life and continue operating after these adjustments (Hennart et al., 1999; Reuer, Zollo, & Singh, 2002; Chung & Beamish, 2010; Iriyama, Shi, & Prescott, 2014). Changes in ownership structure have been related to conditions that already existed at the time of the formation of the joint venture, such as pre-formation experience in several domains (Reuer et al., 2002) and balance in the partners’ equity distribution (Chung & Beamish, 2010; Iriyama et al., 2014). These changes also typically follow periods of poor performance (Zhang & Li, 2001; Chung & Beamish, 2012) and may be seen as an attempt to repair sentiments of inequity and improve partners’ involvement in the joint venture and subsequently improve performance (Brouthers & Bamossy, 2006). There is little evidence on what the real effect of changes in ownership structure is upon subsequent performance of the joint venture, but the available evidence offers little support to the idea that adjustments lead to improved performance (Zhang & Li, 2001). On the contrary, the ﬁndings by Chung and Beamish (2010), showing that the changes in the ownership structure are followed by increases in the chances of dissolution, seem to indicate that in most cases these changes in ownership were not able to overcome the problems that were at the origin of the changes. Therefore, we predict that changes of the initial ownership structure are followed by increases in the chances of subsequent termination of the joint venture. Moreover, increasing one’s own equity signals an increased degree of commitment to the venture, while decreasing one’s equity indicates a lower involvement in the venture. Therefore, we predict that those partners who have increased their equity share in the joint venture will be more likely to fully acquire the venture at a later point in time.

The source of efﬁciency advantages is typically associated with the ability of ﬁrms to develop ﬁrm-speciﬁc assets that cannot be imitated by competitors and that provide the basis for their competitive advantage (Wernerfelt, 1984; Barney, 1991). Firms with such assets are often associated with those that undertake large R&D activities and Delios and Beamish (2001) found that R&D expenditures affect the survival of international joint ventures. Although activities such as R&D entail substantial spending on physical facilities and equipment it is not the physical technology that consists the basis of sustainable competitive advantage. As , (p. 110) puts it, ‘‘Physical technology, whether it takes the form of machine tools or robotics or complex information management systems, is by itself imitable’’. One of the few classes of assets that are not tradeable today are knowledge assets (Teece, 1998) and these assets are thus the real basis of sustainable competitive advantage. We therefore expect that ﬁrms that use knowledge assets more intensively are less likely to be shut down.

Hypothesis 3. Partners who have increased/decreased its equity share in a ﬁrm are subsequently more/less likely to take full control of the ﬁrm.

2.4. Antecedents of the joint venture and closure The fact that some joint ventures start as greenﬁeld investments while others are created from an already existing ﬁrm has implications for the longevity of the joint ventures and for the mode of how these ventures are eventually terminated. To the extent that joint ventures are also subject to the normal risk of doing business, those that have been created from scratch are more likely to be shut down than those that have already been operating for some time. The fact that a ﬁrm has been partially acquired is an indication that the acquiring ﬁrm saw value in the acquired unit. Those productive units that existed prior to the formation of the joint venture and that were thought to be sufﬁciently valuable to be kept in operation within the joint venture are likely to already have a minimum level of efﬁciency that greenﬁeld units do not. As such, these units are less likely to be unviable and are less likely to be terminated by closure. If they are to be terminated, this value makes it likely that the termination will be by passing ownership to a single party, in very much the same way that ﬁrms that have been acquired are more likely to be sold off than shut down (Chang & Singh, 1999).

Hypothesis 5. Joint ventures that make a more intensive use of knowledge assets experience a lower probability of being terminated by closure. 2.6. Firm size Joint ventures face the same normal business risks as any other ﬁrm. Virtually all studies on ﬁrm survival have found that large ﬁrms tend to survive more than small ones (Dunne, Roberts, & Samuelson, 1989; Audretsch & Mahmood, 1994; Mata & Portugal, 1994; Mitchell, 1994; Haveman, 1995; Sharma & Kesner, 1996). A number of reasons have been suggested to account for this. The ﬁrst two are related to superior efﬁciency of large ﬁrms. On the one hand, large ﬁrms may beneﬁt from economies of scale, thereby boosting efﬁciency (Audretsch & Mahmood, 1994). On the other hand, size may also be a consequence of superior efﬁciency. Even if economies of scale are not present, ﬁrms with superior managerial capabilities will have lower costs regardless of size and these lower costs encourage ﬁrms to operate at a large scale (Lucas, 1978). A third reason is related to constraints in accessing funds (Fazzari, Hubbard, & Petersen, 1988). If there are cash constraints, ﬁrms for which these are more severe will be forced to operate at a smaller scale. Even if these constraints do not push smaller ﬁrms into a cost disadvantage via economies of scale, they make it harder to survive unexpected contingencies in comparison to competitors with easier access to funds (Zingales, 1998). Large ﬁrms are also likely to be more diversiﬁed than their smaller counterparts and this may reduce risk and improve survival prospects. All of these reasons suggest that size is likely to be related to the closure of ﬁrms, not necessarily to the other modes of termination. Therefore, we predict that Hypothesis 6. Larger joint ventures experience a lower probability of being terminated by closure than smaller joint ventures.

3. Empirical model For analyzing the time pattern of the longevity of joint ventures we rely on a class of statistical models known as duration analysis

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(Lancaster, 1990) or event history analysis (Allison, 1984). Before going into the details of the speciﬁcation of our empirical model, it is convenient to examine two issues that have implications for our modeling strategy: the ﬁrst is that joint ventures may be temporary by design and that their durations may be determined by partners when the joint ventures are formed. The second is that some of the joint venture may never terminate, at least in one given mode. 3.1. The stochastic nature of the longevity of joint ventures An objection that is sometimes raised to the modeling of the longevity of joint ventures as a stochastic process is the belief that many joint ventures are temporary in nature and terminate when the goal for which they were created in the ﬁrst place is achieved. For example, Geringer and Killing (1988, p. 120) assert that ‘‘quite a few joint ventures are formed to solve what are, for at least one of the partners, temporary problems’’. In their suggestions to managers on how to deal with this issue the authors recommend: ‘‘Set up the venture on a project basis, with a deﬁnite termination date’’. Gulati (1998, p. 307) expresses the opinion that ‘‘many successful alliances terminate because they are predestined to do so by the parent ﬁrms at the very outset’’. To the extent that this is a pervasive phenomenon in reality, the time patterns of terminations might well be determined by the duration clauses as expressed in the joint-venture contracts. In this case, research attempting to analyze the instability of joint ventures should be directed to the reasons that lead partners to stipulate different durations in their contractual arrangements, and ultimately to the speciﬁcity of the projects developed by the joint venture. However, although many joint venture contracts may indeed have a duration clause, very little is known about the time-pattern of these clauses in different contracts. In one of the few studies that analyze data on duration clauses, Luo (2002) reported an average duration of 24.6 years with a standard deviation of 3.5, which is in sharp contrast with the much shorter durations generally observed in empirical studies on joint venture terminations. These two ﬁndings can only be reconciled if no more than a minority of the joint ventures do actually terminate according to the plan. Very little is known too about the extent to which terminations come about as a consequence of the exhaustion of the project that gave rise to the joint venture or as a result of something that was previously unexpected. The few studies on this matter indicate that the latter is by far dominant, only 10% of the joint ventures terminating according to what had been planned (Makino et al., 2007) and only 6% terminating as a consequence of the achievement of the joint-venture’s objectives (Meschi & Riccio, 2008). This suggests that the timing of actual terminations does indeed have an important non-deterministic element, and supports the statistical modeling of the termination of joint ventures. 3.2. Some JVs may never terminate in one given mode The second issue that we examine is the possibility that some termination modes may never be considered by some joint ventures. This does not mean that some joint ventures will never terminate at all; only that some will never choose some modes of terminating. Closure may never be considered by some joint ventures. Utilities are a clear example, but others are possible: producers of goods with low value content per unit of weight or produced in highly speciﬁc facilities, such as mineral water, cement, or providers of services for which a highly speciﬁc distribution network is important are all unlikely to be shut down. If these ﬁrms encounter problems, they may be traded, but actual closure is highly unlikely. This, of course, applies within a foreseeable future.

It is highly unlikely that people will stop drinking water, but if a close substitute for cement is discovered that can be produced at much lower cost, it is not impossible that cement plants will eventually disappear. Also, although there may be some industry characteristics that make this more likely, it need not be the case that all ﬁrms in a given industry do not shut down. It may be that some ﬁrms in that industry consider shutdown as an option while others do not. Some other ﬁrms may never be fully acquired by foreign partners. A ﬁrst reason is that there may be government restrictions in some countries. Restriction may apply across the board (e.g., limit of 74% foreign ownership in India) or to a particular industry (e.g. airlines in most OECD countries, Conway, Janod, & Nicoletti, 2005) or to companies considered to be of national interest (e.g. France) or when acquisitions are considered to be threats to national security (Moran, 2009). Even when there are no such restrictions in the law, countries often seek to impede acquisitions of some ﬁrms by foreigners. One such attempt occurred with success in April 2007 when, despite the nonexistence of any foreign ownership limits on telecommunications in Italy, the Italian Prime Minister Romano Prodi made a call on Italian banks to help stave off the takeover of Telecom Italia by the Mexican America Movil. The Spanish operator Telefonica acquired a minority equity share in the Italian telecom operator, but the government succeeded in achieving its goal of preventing Telecom Italia from becoming foreign controlled. In other countries, even if it is not legally required, it may be difﬁcult to do business without a local partner. A second reason for some joint ventures never becoming fully foreign owned is a heavy reliance on geographically distributed resources. Running a highly decentralized distribution network, for example, requires constant monitoring and will be best done by someone based in the country. While this need not be done through a joint venture (other alternative arrangements may be available, e.g., franchising), if an ‘‘own distribution’’ network is preferred, the foreign partner may never consider operating it itself. Typically, the advantage of foreign partners lies elsewhere, and they will not wish to invest resources locally in areas that are not related to their core advantage. The foreign partner may consider ﬁnding another domestic partner or, if this is not feasible, divest from the country. Finally, domestic partners may never consider acquiring some international joint ventures when the contribution of foreign partners is typically highly speciﬁc. Foreign partners must possess some speciﬁc assets (normally associated with knowledge of a particular technology, or possession of ﬁrmspeciﬁc goodwill, in the form of brands, trademarks, etc.) that enable them to compensate for the liability of foreignness. While learning from foreign partners is certainly possible (Anh, Baughn, Hang, & Neupert 2006), it may be very difﬁcult for a domestic ﬁrm to replace the contribution of the foreign partner, as the knowledge required to eliminate foreign dependency is usually more difﬁcult to acquire than that required to eliminate dependency upon local partners (Inkpen & Beamish, 1997). 3.2.1. The consequence of ‘‘defective’’ risks for the estimation of age dependence The presence in the sample of joint ventures that never terminate in one given mode may bias the estimates of age dependence for that given mode. Age dependence refers to the way the hazard rates evolve over time. Negative (positive) age dependence indicates that the phenomenon is increasingly less (more) likely to be observed as joint ventures get older. Negative age dependence may, however, be observed for spurious reasons if the population under analysis contains unobserved (or unknown) heterogeneous groups of ﬁrms, each exhibiting different levels of risk. In this case, even if there is no genuine age dependence, that is,

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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even if the risk confronting each ﬁrm is constant over time, the observer may conclude that the risk is diminishing over time. This occurs because ﬁrms in the group with higher risk will leave the sample more rapidly than do those in the other group. The remaining sample will, therefore, be made up of an increasing proportion of ﬁrms with a low risk of exit. To make these ideas clearer, consider a simple extreme case in which we have 160 ﬁrms, in two groups of 80 ﬁrms each. One of the groups confronts a constant hazard rate of 50% while the other confronts no risk of exit (0% hazard rate). In the ﬁrst period, 40 ﬁrms from the ﬁrst group will exit, and an observer will calculate the overall hazard rate to be 25% = 40/160. In the second period, 20 ﬁrms (one half of the remaining ﬁrms in the ﬁrst group) will exit again, and the observer will now calculate the hazard rate to be 16.7% = 20/120. Therefore, if the analyst cannot identify the group to which each JV belongs, he runs the risk of concluding for negative age dependence, while this is not warranted by the data. Note that the opposite is not true: one may never be led into the conclusion of positive duration dependence due to the presence of these ‘‘defective’’ risks. In our modeling, we take into account the possibility of such ‘‘defective’’ risks. 3.3. A Statistical model for analyzing the termination of JVs over time As our durations are observed only at year intervals, we will use a simple discrete time duration model: the complementary log-log (clog-log) model (Prentice & Gloeckler, 1978; Jenkins, 1995) (see the appendix for a formal exposition of our model). Applying the same approach as in the conventional proportional hazards model (Cox, 1972), we specify an effect for age (the baseline hazard function) and a multiplicative effect of the explanatory variables upon survival, regression coefﬁcients being interpreted as in standard proportional hazards models. The model can be estimated straightforwardly, by transforming the duration data into binary outcomes, a procedure known as ‘‘episode splitting’’, and using maximum likelihood methods to ﬁt a generalized linear model with binomial error and complementary log-log link (Jenkins, 1995). In the likelihood function, a distinction has to be made between joint ventures that were terminated and those that continued to be run as joint ventures until the end of the survey. To the former we can assign discrete durations. To the latter all we know is that their duration exceeds a given limit, and thus the observations are right censored. This same statistical methodology applies to the three modes of terminating a joint venture and three equations are estimated. In order to separate the determinants of these three different exit modes, a clear distinction has to be made between joint ventures that terminate because the ﬁrm is shut down and those that are fully acquired by domestic or foreign owners. We adopt the conventional assumption that the risks of exit from a joint venture are independent, and when any one of these events occurs, we treat the observation as censored in the other two exit mode equations. 3.3.1. Modeling age dependence A common approach to the modeling of age dependence is to assume that the baseline hazard function follows one given distribution. Among continuous time models, popular choices are the Weibull and the lognormal distributions, used by Park and Russo (1996) in their seminal analysis of the age dependence of joint venture termination. There are, however, serious potential drawbacks with an a priori use of this approach. Those distributions are not general enough to accommodate sufﬁciently varied patterns of age dependence, and the choice of an inappropriate distribution to model the baseline hazard function may seriously endanger our conclusions about the nature of the evolution of the hazard rates over time. In addition, as the most common distributions are not

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nested with each other, it is not easy to choose between them. These problems are compounded when duration data are grouped into time intervals. As before, if the discrete nature of the duration variable is not taken into account, the estimation procedure will lead to inconsistent regression coefﬁcient estimates and to a misleading picture of age dependence. In our model we avoid the imposition of severe distributional assumptions and use a rather ﬂexible speciﬁcation that models the hazard rate as a polynomial function of age (see, e.g., Kennan, 1985; Ham & Rea, 1987). Estimation proceeds from a ﬁrst-order polynomial by adding as many higher order terms as necessary. The process stops when higher-order terms are found not to be signiﬁcant. This allows the hazard function to have as many inﬂection points as is most appropriate to ﬁt the data well, without the parametric constraint that predetermined distribution functions would impose. 3.3.2. Handling terminations that will never occur To incorporate the possibility of ‘‘defective’’ risks, that is, the possibility that some units may survive forever, we redeﬁne the survival function so that the survival probability includes the (unknown) proportion of long-term survivors, which do not terminate in one given mode with certainty, plus the proportion of ‘‘susceptible’’ ﬁrms, multiplied by their corresponding probability of remaining a joint venture until each moment. Models of this type have been used with a single risk in the duration analysis of the acquisition of new products (Anscombe, 1961), deaths by AIDS (Struthers & Farewell, 1989), criminal recidivism (Schmidt & Witte, 1989), timing of births (Heckman & Walker, 1990), and job stability (Yamaguchi, 1992). Generalization to multiple independent risks is straightforward (Addison & Portugal, 2003), with one additional parameter to be estimated for each mode of termination (the probability that joint ventures never terminate via that mode).

4. Data The data used in this paper were obtained from an annual survey (Quadros de Pessoal, hereinafter QP) which is conducted by the Portuguese Ministry of Employment. Unlike most databases employed in the analysis of alliance and foreign direct investment, our data are not restricted to the largest companies, and include ﬁrms of all sizes, as the survey covers all ﬁrms employing paid labor in Portugal. We worked with the original raw data ﬁles from 1982 to 2009, which include over 100,000 ﬁrms in each year. The survey has two characteristics that make this data set an advantageous source for analyzing the survival of joint ventures. First, the survey has a longitudinal dimension, i.e., ﬁrms are identiﬁed by a unique number allowing them to be followed over time. Second, the survey records the share of equity held by nonresidents, which we use for identifying joint ventures. We are concerned here with foreign joint ventures, that is, ﬁrms that have considerable (but not total) foreign equity participation. Because of this we restricted our analysis to those ﬁrms having a foreign participation between 10% and 90%. The 10% threshold is usually employed to distinguish foreign direct investment from portfolio investment, as this is the threshold that normally grants the right to designate one board member. Using this criterion, we were able to identify 3697 newly formed joint ventures, which comprise our sample. An important limitation in the database is that we do not know the identity of the ﬁrms’ owners. This is unfortunate because we are not able to identify the number of partners in the joint venture nor are we able to identify joint ventures in which all partners are foreign companies. Moreover, we are not able to trace the acquisition of a share held by one foreign ﬁrm that is sold to another foreign ﬁrm and, similarly, we

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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cannot identify the transfer of ownership if both the buyer and the seller are domestic ﬁrms. Our deﬁnition of entry involves the creation of a new equity alliance between foreign and domestic partners. These new JVs may be created in three different ways. The ﬁrst involves the creation of a new legal entity. The second is by having a foreign party acquire a stake in an already existing ﬁrm that was until that moment entirely held by domestic owners. The third is by having a domestic partner acquire a stake in an ongoing ﬁrm that was previously entirely owned by foreign owners. Symmetrically, we identify three ways in which an equity joint venture may terminate: by shutting down the ﬁrm, by being totally acquired by domestic partners, or totally acquired by foreign partners. We were able to identify the longevity of joint ventures because ﬁrms are identiﬁed in the survey by numbers, which are assigned sequentially when they ﬁrst report to the survey. The moment at which joint ventures are formed was identiﬁed by comparing ﬁrms’ identiﬁers over the years. Greenﬁeld joint ventures, i.e., joint ventures that did not exist as independent legal entities prior to their formation were located by comparing the ﬁrm’s number with the highest identiﬁcation number in the ﬁle in the previous year. The creation of joint ventures when such creation came about by acquisition was identiﬁed by locating the ﬁrst year in which a previously existing ﬁrm exhibited a percentage of foreign equity between 10% and 90%. Our analysis includes joint ventures that were formed during the period 1983–2008. This period was chosen largely based on the availability of data. It is, however, convenient to stop in 2008, so that our estimates are not contaminated by the effect of the 2009 international crisis. We use data from 2009 only for checking that ﬁrms classiﬁed as closures are indeed not active. To compute termination by closure we located the moment when ﬁrms cease to permanently report to the survey. To be on the safe side in computing life spans with such a large database, we required that a ﬁrm be absent from the ﬁle for at least two years in order to be classiﬁed as a closure. In our analysis we use data only until 2008, with information from year 2009 being used only for the purpose of classifying observations as complete or censored. We do not know the longevity of the JVs that are still active in 2008, and therefore our duration measure is right-censored at 2008. We use information from 2009 to classify ﬁrms that are not in the ﬁle in 2008 as censored or complete. Firms are classiﬁed as censored at 2008 if they appear again in 2009, and as complete if they are also absent from the 2009 ﬁle. For identifying termination of joint ventures by acquisition we located the ﬁrst year in which the ﬁrm’s foreign equity is outside the 10–90% interval. It is, of course, possible that foreign equity goes outside the 10–90% interval in one year and goes inside that interval in a subsequent year. When such multiple episodes of joint ventures occur, to avoid selection issues, we use only the ﬁrst of such episodes. Table 1 shows the numbers of joint ventures created in each of the three ways above. For each of these groups Table 1 also shows the number of those that terminated via the three modes, along Table 1 Formation and termination types of joint ventures. Termination type

Continuation Total

Total Closure Domestic Foreign acquisition acquisition termination Formation type Greenﬁeld 642 Formerly 510 Domestic Formerly 42 Foreign 1194 Total

578 624

176 189

1396 1323

356 459

1752 1782

43

35

120

43

163

1245

400

2839

858

3697

with those that were still active as joint ventures at the end of our observation period. There are a total of 3697 joint ventures being created, of which only 858 are still operating as joint ventures by the end of the period. This may look like a very high exit rate, but keep in mind that, while some of our joint ventures are observed for only one year, others are observed for a period of 26 years. Second, while the literature has focused on acquisitions by foreign partners (e.g. Puck et al., 2009), this is the least common way of terminating a joint venture in our sample (only 15% of the total number of terminations). The most common way of terminating a joint venture is by acquisition by the domestic partner, closely followed by closure. Third, greenﬁeld joint ventures and those that were previously owned by domestic partners are roughly of equal importance, while joint ventures that are formed from a previously fully foreign owned ﬁrm represent a minor fraction (4%) of the total. Fourth, the number of closures (1194) is smaller than the number of greenﬁeld joint ventures (1752), and this holds even if we subtract the number of greenﬁeld joint ventures that are still operating as joint ventures by the end of the period (net of 1396). Similarly, the number of joint ventures that are created from a previously domestic owned company (1782) is also greater than the number of joint ventures that eventually become wholly domestic owned (1245) and this also holds if we subtract the number of still ongoing businesses (1323). In contrast, the number of joint ventures that are formed from an existing wholly foreign owned ﬁrm (163) is much smaller than the number of those that eventually become wholly owned by foreigners (400). 4.1. Variables We use the information in our data set to develop measures for the variables outlined in Section 3 that account for the survival of ﬁrms. We measure the antecedents of the joint venture with two dummies indicating the ﬁrm status prior to becoming a joint venture. One dummy indicates whether the ﬁrm was previously wholly foreign owned, while the other indicates whether it was previously wholly owned by domestic owners. The omitted category includes ﬁrms that were created simultaneously with the creation of the JV. We also wish to include a measure of the share of equity held by foreigners. While the foreign share can vary on a continuous scale between 0 and 100, earlier studies (e.g. Franko, 1989) typically used categories such as minority, equal stake, majority owned joint ventures to account for partners’ control over joint ventures. More recently, Dhanaraj and Beamish (2004) suggested that equity share should be used to explain survival of international joint ventures rather that these broad categories. The variable used in this work is the logarithm of equity share. We account for changes in the ownership split with two dummy variables that indicate whether the last change in equity was in favor of reinforcing the domestic or the foreign position in the joint venture. The ﬁrst of our dummy variables (Foreign Equity Increase) takes the value 1 from the year when foreign equity increases until the moment foreign equity is decreased if this ever happens. Similarly, the dummy variable Domestic Equity Increase takes the value 1 from the year when domestic equity increases until the moment domestic equity is decreased, if ever. These variables can both take the value 0 if equity has not changed, but they cannot both take the value 1. As a robustness check we deﬁned another pair of dummy variables that take the value 1 only in the year when foreign or domestic equity increases, as Chung and Beamish (2010) report that the effect of changes in equity is particularly prominent immediately after the change in equity. Results remain qualitatively the same.

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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Table 2 Descriptive statistics.

Formerly domestic Formerly foreign Initial equity share Foreign equity increased Domestic equity increased Knowledge intensive Size Foreign presence

(1) (2) (3) (4) (5) (6) (7) (8)

Mean

Standard deviation

0.489 0.042 0.776 0.104 0.081 0.357 2.432 0.149

– – 0.533 – – – 1.641 0.170

Correlations (1)

(2)

(3)

(4)

(5)

(6)

(7)

0.206 0.116 0.022 0.004 0.031 0.276 0.018

0.075 0.025 0.006 0.015 0.118 0.059

0.112 0.015 0.032 0.155 0.104

0.102 0.004 0.102 0.086

0.022 0.089 0.035

0.013 0.089

0.251

We measure the propensity to develop knowledge assets by including a dummy that indicates whether the sector in which the ﬁrm operates is knowledge intensive. This is deﬁned aggregating industries classiﬁed as high-technology and medium-high-technology in manufacturing and as Knowledge Intensive Services. This classiﬁcation is provided by Eurostat (available at http://epp. eurostat.ec.europa.eu/cache/ITY_SDDS/en/htec_esms.htm) and has been used in several academic studies (e.g. Godin, 2004; Garcı´a-Manjo´n & Romero-Merino, 2012). Size is measured here by the logarithm of the number of persons in the ﬁrm. Earlier reported evidence on the effect of ﬁrm size on the survival of ﬁrms suggests a very robust negative effect (Mitchell, 1994; Haveman, 1995; Sharma & Kesner, 1996). The relationship between size and the likelihood of divestiture is less obvious and the empirical studies that have analyzed exit by divestment have not found any signiﬁcant relationship between divestment and the size of ﬁrms (Schary 1991; Mitchell, 1994). In addition we control for the extent of foreign presence in the industry in which entry is attempted. The impact of previous presence of foreign ﬁrms upon the survival of the new foreign owned ﬁrms has been scrutinized in several studies (e.g., Mascarenhas, 1992; Mitchell, Shaver, & Yeung, 1994; Shaver, Mitchell, & Yeung, 1997). Most of the arguments developed in this line of research are of a time-series nature, comparing the positions of ﬁrst-movers with those of late-movers. In our case variation is largely cross-sectional. We thus expect previous foreign presence to signal the presence of those characteristics, such as advertising and technological intensity, which make foreign survival more likely. These are characteristics that we are not able to observe directly, but that are also related to the previous presence of foreign ﬁrms in the market (Dunning, 1993; Caves, 1996). We include previous foreign presence in the industry as a means of controling for these unobserved industry characteristics, which may be related to the survival of foreign ﬁrms. Foreign presence is measured by the proportion of employment in the industry that is accounted for by foreign ﬁrms. Summary statistics for the independent variables above and correlations between them are shown in Table 2. 4.2. Patterns of termination of joint ventures Fig. 1 shows our estimates of the survival rates for each of the three termination modes discussed above. Although our data cover a span of 26 years (1983–2008), and all the available data are used in the regressions, the table displays the survival rates for the ﬁrst 18 years only. As age increases, the number of observations falls for two reasons. One reason is that there are joint ventures that terminate. Only 78% of the total number of joint ventures in our sample are able to make it through the following year, only 50% remain as joint ventures after the third year, and fewer than 10% remain after the thirteenth year. The second reason is that not all joint ventures are observed over the same number of years. While

those that are formed in 1983 are observed for 26 years, those that are formed in 2003 are observed for only 6 years. These two effects compound to produce smaller samples for older ages, and thus less precise estimates. Consequently, for older ages the precision of the estimates is lower than for younger ones. The plots in Fig. 1 show that the different functions seem to converge to values that are clearly above zero, unlike what happens to the overall termination rate. This suggests that there may be a fraction of joint ventures that, indeed, never terminate in one given mode. Second, the concavity of the different functions seems to be quite different. In particular, termination by acquisition by the foreign partner is visibly less concave, which suggests that the probability of termination increases with age. These plots also show that these survival rates for the different termination modes converge to some value above zero, while overall survival converges toward zero. This suggests that it is possible that some of the joint ventures do not confront termination by one speciﬁc mode and that our modeling that takes into account such a possibility is indeed appropriate. Fig. 2 goes into greater detail in the analysis of the chances of termination over time and shows the observed empirical hazard rates of a joint venture being terminated by closure, by acquisition of the domestic partner, and by acquisition of the foreign partner, respectively. The observed patterns of the hazard function are clearly different for the three types of exit. The hazard function decreases for termination by closure, at least during the ﬁrst years, to increase at a later point in time. The hazard rates of being acquired by a domestic partner are decreasing over time, although they are somewhat irregular. Finally, the hazard rates of being acquired by the foreign partner are increasing over time, again with greater irregularities for the later periods of life. The regressions presented in the next section also allow us to take into account the effects of the determinants of termination upon these hazard rates and the possibility that some joint ventures never terminate in a given mode, as discussed above. 5. Results Results of our regression analysis are reported in Tables 3 and 4. Table 3 shows the results of the conventional complementary log-log model, while the results in Table 4 take into account the possibility that there exists a fraction of joint ventures that does not confront the risk of being terminated via the mode under analysis. For each model we report a speciﬁcation with only a linear term on age, and one with a quadratic term as well. The results give partial support to our ﬁrst hypothesis, which posited that the acquiring partner is the one that leaves the ﬁrm more easily if the joint venture is to be dissolved. The coefﬁcient associated with the Formerly Foreign variable in the foreign acquisitions equation is positive, indicating that ﬁrms that were once fully owned by foreign owners are more likely to become fully

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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Closure

1

1

0.75

0.75

Survival rate

Survival rate

Overall

0.5 0.25

0.5 0.25 0

0 0

2

4

6

8

10

12

14

16

0

18

2

4

6

12

14

16

18

14

16

18

Age

Domesc Acquision

Foreign Acquision

1

1

0.75

0.75

Survival rate

Survival rate

10

8

Age

0.5 0.25

0.5 0.25

0 0

2

4

6

8

10

12

14

16

0

18

0

Age

2

4

6

8

10

12

Age Fig. 1. Survival rates by different types of termination.

owned by foreigners again. Similarly, ﬁrms that were fully owned by domestic owners before the joint venture are more likely to return to full domestic ownership, but in this case the effect is not statistically signiﬁcant.

Our next set of ﬁndings has to do with the ownership arrangements, as reﬂected in the share equity held by foreign partners. We ﬁnd that the initial split of equity between domestic and foreign partners is clearly relevant to the probability of

Overall

Closure

0.25

0.12 0.1 Hazard rate

Hazard rate

0.2 0.15 0.1 0.05

0.08 0.06 0.04 0.02

0

0 3

-2

8

13

18

-2

3

8

Age

Domesc Acquision

13

18

0.08 0.07

0.1

0.06

0.08

Hazard rate

Hazard rate

18

Foreign Acquision

0.12

0.06 0.04

0.05 0.04 0.03 0.02

0.02

0.01

0 -2

13

Age

0 3

8

13

18

-2

3

Age

8 Age

Fig. 2. Hazard rates for different types of termination.

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Table 3 Regression results—clog–log model. Variables

(1)

(2)

Closure Formerly domestic Formerly foreign Initial equity share Foreign equity increased Domestic equity increased Knowledge intensive Size Foreign presence Age Age squared Constant Log L

0.111* (0.062) 0.058 (0.163) 0.011 (0.057) 0.206* (0.120) 0.148 (0.117) 0.121* (0.062) 0.197*** (0.022) 0.211 (0.198) 0.061*** (0.010) 1.657*** (0.076) 4016.3

(3)

(4)

Domestic acquisition 0.109* (0.062) 0.059 (0.163) 0.009 (0.057) 0.187 (0.121) 0.170 (0.118) 0.121* (0.062) 0.196*** (0.022) 0.208 (0.198) 0.098*** (0.024) 0.003* (0.002) 1.591*** (0.085) 4014.9

0.035 (0.061) 0.094 (0.161) 0.312*** (0.051) 0.234** (0.110) 0.062 (0.112) 0.092 (0.059) 0.030 (0.020) 0.745*** (0.198) 0.034*** (0.009) 2.374*** (0.076) 4190.1

(5)

(6)

Foreign Acquisition 0.034 (0.061) 0.094 (0.161) 0.313*** (0.051) 0.243** (0.111) 0.053 (0.113) 0.092 (0.059) 0.030 (0.020) 0.746*** (0.198) 0.017 (0.024) 0.001 (0.002) 2.404*** (0.087) 4189.8

0.028 (0.111) 0.367* (0.194) 1.306*** (0.133) 0.566*** (0.144) 0.400* (0.211) 0.081 (0.105) 0.152*** (0.032) 0.630** (0.273) 0.039*** (0.013) 3.482*** (0.137) 1734.4

0.029 (0.111) 0.360* (0.194) 1.306*** (0.133) 0.532*** (0.145) 0.441** (0.212) 0.082 (0.105) 0.152*** (0.032) 0.616** (0.274) 0.092** (0.038) 0.003 (0.002) 3.594*** (0.158) 1733.2

Standard errors in parentheses. Signiﬁcance is indicated as follows *** p < 0.01, ** p < 0.05, * p < 0.1. Number of observations is 14,340. Number of zero outcomes is 1194 for closure, 1245 for domestic acquisition, and 400 for foreign acquisition.

subsequent acquisition by these partners. The greater the share of equity that one partner holds in a joint venture, the more likely it is that this partner eventually becomes the full owner of the ﬁrm. Partners with very small stakes in the ﬁrm may tend to free-ride on the dominant partner, and this partner may ﬁnd it necessary to dissolve the joint venture. In addition, an even split of ownership at the beginning of the joint venture also may reﬂect disproportionate contributions from both parties to the success of the venture, and the party with the greater involvement may ﬁnd it easier to put in the extra effort required to fully operate the venture. We also ﬁnd that foreign equity share is not important to the probability of closure, which seems to indicate that a greater or smaller foreign share does not really increase overall efﬁciency of the joint venture. Changes in equity split seem to have a very clear effect upon the probability of dissolving the joint venture by acquisition. Increasing the share of foreign equity has a positive and signiﬁcant effect upon the probability of being acquired by the foreign partner and a negative and equally signiﬁcant effect upon the probability of being acquired by the domestic partner. Decreasing the share of foreign equity has a negative and signiﬁcant effect upon the probability of being acquired by the foreign partner, but does not increase the chances of being acquired by the domestic partner. If anything, decreasing the share of foreign equity leads to an increased probability of closure. The results clearly corroborate our fourth hypothesis. Joint ventures formed from an already existing ﬁrm are less likely to be shut down. This holds true regardless of whether the ﬁrm was

previously domestic or foreign owned, although the coefﬁcient associated with being previously domestic owned is not signiﬁcantly different from zero. However, the two estimated coefﬁcients are remarkably similar in magnitude and the hypothesis that they are identical cannot be rejected. Firms that were already operating are likely to have value independently of the joint venture and are, therefore, less likely to see their operations discontinued. Being in knowledge intensive industries is found to affect the closure of joint venture as expected. Joint ventures in a knowledge intensive industry are less likely to be shut down. In contrast, joint ventures in such industries are more likely to be acquired by the domestic or foreign partners. We did not ﬁnd any signiﬁcant effect of knowledge intensity upon acquisition by one of the partners. We hypothesized that to the extent that high knowledge intensity signals the presence of highly speciﬁc assets, joint ventures would be more difﬁcult to be dissolved by acquisition by one of the partners. The evidence, however, does not support this hypothesis. It may be that high knowledge intensity also makes the ﬁrm more valuable for acquisition and that this effect mayoffset the other. The available data do not allow us to go deeper into this issue. We obtained the expected pattern of results for the relationship between size and closure. Larger ﬁrms are less likely to be closed down. The above relationship between size and closure conﬁrms our predictions. Larger ﬁrms, being likely to be more efﬁcient and have fewer constraints, are more apt to survive. We also found that larger ﬁrms are more likely to be acquired by foreign partners and less likely to be acquired by domestic partners (although the effect is not signiﬁcant in the latter case).

Table 4 Regression results—clog–log model with defective risks. Variables

(1)

(2)

0.154** (0.073) 0.149 (0.183) 0.007 (0.066) 0.123 (0.142) 0.240* (0.137) 0.129* (0.068) 0.239*** (0.026) 0.063 (0.251) 0.004 (0.015) 1.260*** (0.097) 0.291* (0.035) 4008.06

(4)

Domestic acquisition

Closure Formerly domestic Formerly foreign Initial equity share Foreign equity increased Domestic equity increased Knowledge intensive Size Foreign presence Age Age squared Constant Prob. never fail Log L

(3)

0.150** (0.073) 0.168 (0.183) 0.008 (0.066) 0.083 (0.144) 0.265* (0.138) 0.127* (0.068) 0.237*** (0.026) 0.064 (0.251) 0.051* (0.029) 0.004* (0.002) 1.184*** (0.101) 0.295* (0.032) 4006.3

0.050 (0.070) 0.091 (0.178) 0.354*** (0.058) 0.276** (0.122) 0.010 (0.125) 0.105* (0.064) 0.042* (0.023) 0.735*** (0.225) 0.011 (0.019) 2.204*** (0.098) 0.211* (0.050) 4187.2

(5)

(6)

Foreign acquisition 0.050 (0.070) 0.092 (0.179) 0.355*** (0.058) 0.273** (0.123) 0.012 (0.125) 0.106* (0.064) 0.042* (0.023) 0.730*** (0.227) 0.006 (0.027) 0.001 (0.002) 2.185*** (0.118) 0.218* (0.052) 4187.1

0.053 (0.122) 0.540** (0.248) 1.372*** (0.142) 0.551*** (0.159) 0.456** (0.224) 0.107 (0.111) 0.165*** (0.035) 0.658** (0.316) 0.071*** (0.020) 3.209*** (0.178) 0.294** (0.093) 1732.6

0.051 (0.121) 0.522** (0.251) 1.361*** (0.142) 0.537*** (0.159) 0.466** (0.223) 0.106 (0.111) 0.164*** (0.035) 0.656** (0.312) 0.097** (0.041) 0.002 (0.003) 3.303*** (0.224) 0.267*** (0.117) 1732.3

Standard errors in parentheses. Signiﬁcance is indicated as follows *** p < 0.01, ** p < 0.05, * p < 0.1. Number of observations is 14,340. Number of zero outcomes is 1194 for closure, 1245 for domestic acquisition, and 400 for foreign acquisition.

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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Finally, previous foreign presence in the industry is important to termination by acquisition, but not for closure. This variable has opposite signs in the two acquisition equations. Foreign acquisition is more likely in industries with greater foreign presence, while domestic acquisitions are less likely in these industries. We expected that closures of joint ventures would also be less likely in industries with a strong foreign presence, on the grounds that the industries having a strong foreign presence would be those that are more conducive to the survivability of international joint ventures. We did not ﬁnd such and effect, however. Our ﬂexible speciﬁcation of the effect of age allowed us to uncover a rather disparate effect of age upon termination modes. We found a U-shape pattern for closure, an upward sloping effect for acquisition by foreign partners, and no effect of age for the acquisition by domestic partners. In no case did age attract a negative and signiﬁcant coefﬁcient. We report only a linear and a quadratic speciﬁcation for each of the exit modes, as cubic terms were never signiﬁcant. The quadratic term was signiﬁcant only in the closure equation and the estimates imply that the minimum of the hazard rate is at the age of 6.4 years. Table 4 reports that results of estimating a model in which we account for the possibility that some joint ventures never terminate in one given mode. The probability that this happens is estimated to be sizable, with a magnitude of around 30% for closure and foreign acquisition and 21% for domestic acquisition. Note that this result also means that very few of the joint ventures are sheltered from the overall risk of terminating. The overall probability of never terminating is given by the product of the probabilities that joint ventures never terminate in each mode. Given our estimates of these probabilities, the overall probability that joint ventures never terminate is a mere 2%. Taking into account the possibility that some joint ventures never terminate in one given mode produces somewhat larger coefﬁcient estimates, except those concerning the effect of age, but does not change the qualitative results. As expected, the impact of controlling for the possibility that some joint ventures do not confront the risk of terminating in one particular mode attenuates the negative effect of age. In the complementary log-log model, the coefﬁcient of Age is negative and signiﬁcant for the closure and domestic acquisition equations (Table 3, columns 1 and 3). Accounting for the possibility of no termination produces age coefﬁcients that are not signiﬁcant in both of the equations (see Table 4, columns 1 and 3). The effect of age is positive in the foreign acquisition equation. For this equation, accounting for the possibility of no termination produces age coefﬁcients that are larger than when such possibility is not accounted for (see column 5 in Tables 3 and 4). As explained above, not accounting for such a possibility biases the results toward negative age dependence and can generate a spurious negative relationship, but not a positive one. We ﬁnd that not accounting for it leads to a sizeable underestimation of the true effect. The quadratic speciﬁcation is signiﬁcant only in the closure equation. Accounting for the possibility of no terminations in the quadratic speciﬁcation in this equation produces changes in the coefﬁcients such that the minimum of the hazard function is found at the seventh year rather than at the eighteenth, as was the case when no such possibility was accounted for. The cubic speciﬁcation never produces any signiﬁcant coefﬁcients for the cubic term. 6. Discussion Our results suggest a complex pattern for the effect of age upon termination of joint ventures. During the ﬁrst years the likelihood of closure decreases, but after a number of years (not many, according to our estimates) the likelihood of exit starts to increase.

Acquisitions by the domestic partners – the other mode by which foreign equity can leave a country – remains at roughly the same level over time, which means that overall, foreign owned ﬁrms are less likely to remain active in the host country as time goes by. This pattern is at odds with the suggestion of Zaheer and Mosakowski (1997). They present evidence suggesting that the chances of exit by foreign ﬁrms decreases over time and the difference relative to the corresponding pattern of domestic ﬁrms attenuates over time. According to their explanation, foreign ﬁrms would be more likely to exit during the ﬁrst years of operation, due to a liability of foreignness, but as experience brings knowledge about local conditions, this initial disadvantage vanishes and exit becomes as likely as that for a comparable domestic ﬁrm. Our results are also at odds with the suggestion that age should improve the chances of joint venture survival, as a consequence of age enabling the development of trust among partners (Inkpen & Currall, 2004). On the contrary, our results for international joint ventures are more consistent with a view of footloose multinationals (Gorg & Strobl, 2003). Foreign ﬁrms may enter a country to exploit an opportunity that is limited in time—or will stay in the country as long as an alternative does not emerge that is more interesting. Gorg and Strobl (2003) have found that foreign ﬁrms are more likely to exit the country than comparable domestically owned ﬁrms. The same ﬁndings are reported by Mata and Freitas (2012), who further indicate that foreign ﬁrms become more and more likely to exit over time. Our observation that foreign ﬁrms exit the country with probabilities that increase over time is closer to the view of the footloose multinationals than to that of a diminishing liability of foreignness. On the contrary, foreign partners will fully acquire the joint ventures with increasing probability over time. This observed pattern for foreign acquisition ﬁts well the view of joint ventures as options to expand in those cases where the foreign owner would wish to do so (Kogut, 1991). However, Buckley and Casson (1998) argued persuasively that the domestic partner may also be a ready buyer in those cases in which the foreign ﬁrm decides to divest. The option value of joint ventures would reside in the possibility of acquiring information about market prospects for some time before making the subsequent decision on whether to acquire or divest (Kumar, 2005). As formulated by Buckley and Casson (1998), the theory of joint ventures as bilateral options does not necessarily assign asymmetrical positions to partners in the process of joint venture termination. Our evidence, however, suggests an important asymmetry between the acquisitions and divestments by foreign partners, which involves a rather more passive role for domestic than for foreign partners. Foreign partners will never consider acquiring some joint ventures. In those cases in which they do, however, they do so with increasing probabilities over time. Still, the probability of fully acquiring the joint venture is low as compared to the probability of dissolving it. The two combined ﬁndings indicate that foreign partners will exit the country with an increasing probability over time. On the contrary, domestic partners will not become more active in seeking to do it (or in successfully doing it) over time. Taken together with the observation that multinationals may be footloose, it is tempting to speculate that domestic partners take full control of the joint ventures when, and if, foreign partners are no longer interested in taking part in them. These different patterns for the evolution of the probability of joint ventures being terminated through the acquisition by one or the other partner is consistent with the idea that the assets of the domestic partner are easier to learn than the assets of the foreign partner (Inkpen & Beamish, 1997). Foreign partners may learn from domestic ones what they need for operating a whollyowned business, but there is no evidence that domestic partners easily do the same.

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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7. Conclusion This paper reports the results of a detailed investigation into the patterns of joint venture termination, distinguishing three modes of terminating a joint venture: closure, acquisition by the foreign partner, and acquisition by the domestic partner. First, we were able to uncover the role played by ownership structure at very different moments upon the termination of joint ventures: previous ownership of the business unit before the joint venture is created, equity arrangements at the time the joint venture is formed, and subsequent changes in such arrangements all affect the likelihood of the joint venture becoming fully owned by domestic or foreign partners. Speciﬁcally, we ﬁnd that joint ventures that were fully owned by foreigners before the formation of the joint venture are signiﬁcantly more likely to become wholly owned by foreigners again. The more equity one of the partners owns when the joint venture is created, the more likely it is that this partner will become the sole owner of the venture. Finally, any changes in the equity split that occur after the formation of the joint venture at the time of the formation tip the acquisition in favor of the partner that increased its equity share. Which partner acquires sole ownership of the joint venture is also found to be related to the previous foreign presence in the industry. Foreign presence favors acquisitions by foreign partners and decreases the odds of acquisition by the domestic partner. In contrast, termination by closure is not related to ownership structure. Instead, it is associated with factors that have been identiﬁed as determinants of ﬁrm exits in general, such as size, intangible assets, and existence previous to the formation of the joint venture. Second, we ﬁnd that there is a non-negligible proportion of joint ventures that never terminate in any of the three modes considered. Not controlling for this effect would lead us to conclude for a much greater negative effect of age upon termination than is warranted when such an effect is accounted for. Furthermore, the temporal patterns of exit are complex and differ depending on the termination mode. The odds of a joint venture being acquired by a domestic partner are fairly constant over time. The chances of a joint venture being shut down increase, at least after a period which is not too long. In contrast, we ﬁnd that the odds of termination by foreign acquisition increase over time. Our results for the effect of age upon acquisition by foreign partners are consistent with a view of joint ventures as options to expand (Kogut, 1991) and that partners use the ﬁrst years of the joint venture to learn about its prospects. When joint ventures terminate by acquisition by one of the partners, the evidence indicates that this is much more likely to occur via the acquisition by foreign partners than by domestic ones. The absolute number of acquisitions by the foreign partner is much smaller than that of acquisitions by domestic partners. Even so, the pattern of such acquisitions over time is much different, which suggests that domestic and foreign partners are not symmetrical. Our results have implications for both policy makers and practitioners. Some countries – especially developing countries – require or provide incentives for the formation of joint ventures in the hope that local partners learn from their foreign counterparts (see the discussion in Desai, Foley, & Hines 2004 and also UNIDO, 2006). To the extent that this learning would be effective and the foreign partner would become expendable, we should observe an increasing probability of joint ventures being converted to wholly owned domestic ﬁrms over time. We do not observe such a tendency in our data. This result is especially notable as it is obtained from a sample in which the local partners are from a developed country, which may have a greater capacity to learn from foreign partners than that existing in managerial teams in developing countries. Our results also speak to practitioners who may be confronted with problems in their joint ventures. If

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confronted with problems, partners may be tempted to change the equity split as part of the corrective actions. Practitioners should be aware that this typically does not translate into greater stability of the joint venture—and be prepared to deal with an increased likelihood of termination. No study is without limitations and ours is no exception. First, we do not claim to cover all possible explanations for the termination of joint ventures. In particular, as mentioned above, we do not know the identity of the partners and, as such, we are not able to control for the many facets of distance, such as cultural, linguistic, geographic or socio-economic, that have been suggested in the literature as relevant for the operations of joint ventures (Barkema & Vermeulen, 1997; Makino & Beamish, 1998; Zhang & Li, 2001; Glaister, Husan, & Buckley 2003; Dhanaraj & Beamish, 2004; Anh et al., 2006; Meschi & Riccio, 2008; Yamin & Golesorkhi, 2010), and these may also be an important part of the story. In addition, our study is performed with data from a single country. While we do not have any reason to expect that the speciﬁcities of Portugal may greatly inﬂuence the results, replication of the analysis for other host countries would, of course, be welcome. Acknowledgments We are grateful to the audiences in several seminars and conferences and three referees for comments and to Lucena Vieira for research assistance. Support from Nova Forum and Fundac¸a˜o para a Cieˆncia e Tecnologia is also acknowledged

Appendix A. Our empirical model Consider time to be divided into k intervals ½t 0 ; t 1 Þ, ½t 1 ; t 2 Þ ½t k1 ; 1Þ. We observe joint ventures at discrete points in time T 2 {1, . . ., k}, where T = t denotes the termination of a joint venture within the interval ½t t1 ; t t Þ. The hazard function, which gives the probability of terminating the joint venture during interval t, given that it was still active at the beginning of this interval, is given by

hðt Þ ¼ P ðT ¼ tjT t Þ;

t ¼ 1; 2; . . . ; k 1

and the survivor function, which gives the probability of staying active up until time T is deﬁned as Sðt Þ ¼ PðT t Þ ¼

t Y ½1 hð jÞ: j¼1

To incorporate the effect of explanatory variables upon survival, we apply the same approach as in the conventional proportional hazards model (Cox, 1972), and deﬁne 0

Sðtjxi Þ ¼ S0 ðt Þexpðxi bÞ where S(t|xi) is the probability that the individual joint venture i with covariates xi (which measure those of its characteristics that are relevant to survival), will remain active up to time t, and S0(t) denotes the baseline survivor function (that is, when the covariates equal zero). Given the relationship between the hazard and the survivor functions above, one can write

1 hðtjxi Þ ¼ ½1 h0 ðtÞ

expðx0i bÞ

which leads to the clog-log hazard function

hðtjxi Þ ¼ 1 ½1 h0 ðt Þ

expðx0i bÞ

Please cite this article in press as: Mata, J., & Portugal, P. The termination of international joint ventures: Closure and acquisition by domestic and foreign partners. International Business Review (2015), http://dx.doi.org/10.1016/j.ibusrev.2014.12.004

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J. Mata, P. Portugal / International Business Review xxx (2015) xxx–xxx

To incorporate the possibility of ‘‘defective’’ risks, that is, the possibility that some units may survive forever, we redeﬁne the survival function, which represents the proportion of joint ˜ ¼ ð1 pÞ þ pSðtÞ, ventures that did not terminate until t as SðtÞ where p is the proportion of joint ventures that face a risk of dissolution, that is, which are indeed ‘‘susceptible’’ to the risk of failure. The survival probability is, therefore, given by the proportion of long-term survivors, (1 p), which do not exit into a given destination with probability 1, plus the proportion of ‘‘susceptible’’ ﬁrms, p, multiplied by their corresponding probability of remaining a joint venture until t, S(t). Models of this type have been used in a broad number of applications of duration models. Generalization to multiple independent risks is straightforward, the maximization of the likelihood function producing estimates for one additional unknown parameter p for each mode of termination. In order to guarantee that each p lies between zero and one, the logit reparameterization for p = exp(m)/(1 + exp(m)) was employed. This has no other consequence in terms of ﬁnding evidence of long-term survivors, since it does not preclude p from being as close to one (or zero) as needed.

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The termination of international joint ventures: Closure and acquisition by domestic and foreign partners

The termination of international joint ventures: Closure and acquisition by domestic and foreign partners

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